HMRC has for a while now been targeting landlords who try to avoid paying tax by failing to declare their lettings income properly. While some landlords are understandably confused by changing regulations making honest mistakes, there are always a few trying to bend the rules. Accounting experts reveal three common ways that mischievous landlords use to save money on their tax returns, and some more legitimate ways of minimising their tax bill.
Although HMRC has been pursuing second home owners and buy to let landlords for some time now, with warnings of high penalties for failing to declare the income of their property correctly, some landlords manage to get away with it.
London based small business accountants Accounts and Legal have listed 3 common ways that mischievous landlords use to escape paying the taxman:
- Deduct capital repayment of mortgage
Anyone renting out a property needs to pay tax on the profits they have made, and the amount will vary depending on their personal circumstances. The interest on a mortgage is still tax deductible (for now at least), while capital repayments are not. Some Landlords mistakenly think that they can claim for both, and that tends to get them into a bit of trouble.
- Claiming for improvements
General maintenance and repairs to a property are perfectly allowable expenses. But trying to claim for improvements to a property by replacing a perfectly functional item with a for example more expensive one, is not allowed. For instance, if you repair a roof you can set it against the rental income, but put in a roof extension and that is classed as a capital expenditure. Changing a perfectly functional kitchen work top with a marble one does not qualify either.
- Void period
Landlords have previously been exempt from paying council tax during void periods, or ‘turnaround times’, when properties have stood without a letter. But since 1st April 2013 this is no longer an option. Some councils do actually offer discount rates on council tax and provide grace periods before claiming council tax. The only comfort is that these costs are legitimately tax deductible.
How Landlords can save money
Some of the allowed expenses are for example water rates, council tax, gas and electricity, insurance, letting agent fees and direct costs such as phone calls, stationary and advertising for new tenants.
For landlords who are quick on their feet, they are also entitled to the ‘Energy Saving Allowance’ until 6th of April this year, where it’s possible to claim a special tax deduction of up to £1500 per property when installing insulation in a rental property.
Landlords can also take advantage of the interest allowance, for properties that have increased in value. A landlord can take out additional loans on the increased value of a property and claim interest for it, as long as this amount does not exceed the purchase price of the property.
If landlords have a spouse without a source of income, it is sometimes possible to take advantage of their personal allowance. You can assign a part or all of the rental income to your significant other, allowing them to exploit their personal tax allowance to save you money.
But it is not only the well known landlords that are being targeted.
It is a little known fact that estate agents are required to provide HMRC with details of landlords’ rental properties and rental income on an annual basis. So for landlords trying to avoid tax, it might only be a matter of time before the tax man catches up with them.